01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
Essex Property Trust (NYSE: ESS) closed 2018 with a portfolio of 245 operating apartment communities (59,661 homes) concentrated on the West Coast, with 83%a of rental revenue from California.
Total property revenues rose 2.7% to $1.39 billionb, and 2018 Same-Property revenue grew 2.8%, driven by a 2.5% increase in average rents to $2,231 per home. Same-Property NOI rose to $922.5 million, up about 2.9% from 2017. Diluted EPS fell to $5.90 from $6.57, largely because 2017 included an $88.6 million remeasurement gain on the Palm Valley co-investment that did not recur.
Core FFO per diluted share was $12.57c, up about 5.5% from $11.91, and management guided 2019 Same-Property revenue growth of 2.5% to 3.5%. The balance sheet remains conservative, with total debt of about $5.6 billion, investment-grade ratings (BBB+/Baa1), and a weighted average fixed-rate public bond coupon of 3.9%. Management reported $134.5 million of unrestricted cash and $209.5 million of marketable securities.
The company sold Domain and 8th & Hope for total gains of $61.9 milliond and bought the remaining 49.9% of the Marquis co-investment. Essex did not issue equity in 2018 but kept $900 million of ATM capacity available, and it repurchased $52.3 million of stock under its buyback program. Development exposure is meaningful: six projects totaling 1,861 homes carry about $1.2 billion of estimated total cost, with about $417 million still to be spent.
Key risks for investors include concentration in high-cost, rent-regulated coastal markets, with rent-control initiatives, Proposition 13 reassessment risk, and earthquake exposure all flagged. Interest-rate sensitivity is modest because about 88% of debt is fixed rate, but refinancing costs and the dividend payout ratio (the 2018 dividend was $7.44 per share against Core FFO of $12.57) bear watching. The 2019 Same-Property revenue outlook implies slower growth than 2018, and new supply in Southern California and Seattle is a further headwind.
02—Key points
Key Highlights
- Same-Property revenue grew 2.8% in 2018 to $1.28 billion, with average rental rates up 2.5% to $2,231 per apartment home.
- Core FFO per diluted share rose to $12.57 from $11.91 (about 5.5%); FFO per share was $12.76.
- Diluted GAAP EPS declined to $5.90 from $6.57, mainly because 2017 included an $88.6 million co-investment remeasurement gain.
- Dispositions of Domain and 8th & Hope generated $61.9 million of gains, and $352 million of total proceeds.
- Debt totaled about $5.6 billion, with 4.5% weighted average mortgage debt and 3.9% average coupon on fixed-rate public bonds; ratings are BBB+/Baa1/BBB+ (Fitch/Moody's/S&P).
- Development pipeline of 1,861 homes carries about $1.2 billion of total estimated cost, with roughly $417 million remaining to spend.
- 2019 guidance projects Same-Property revenue growth of 2.5%–3.5% and operating expense growth of 2.5%–3.5%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $1.40B$1.36B | +2.7% |
| Operating Expenses | $949.92M$917.38M | +3.5% |
| Operating Income | $511.99M$472.94M | +8.3% |
| Interest Expense | $220.49M$222.89M | −1.1% |
| Net Income | $390.15M$433.06M | −9.9% |
| EPS (Basic) | $5.91$6.58 | −10.2% |
| EPS (Diluted) | $5.90$6.57 | −10.2% |
| Shares Outstanding (Basic) | 66.04M65.83M | +0.3% |
| Shares Outstanding (Diluted) | 66.09M65.90M | +0.3% |
05—Questions
Frequently Asked Questions
How did Essex perform financially in 2018, and what drove the change in earnings per share?
Total revenues rose 2.6% to $1.40 billion, and net income attributable to common stockholders was $390.2 million, or $5.90 diluted EPS. That compares with $6.57 in 2017. The decline is mainly the result of the $88.6 million remeasurement gain recorded in 2017 on the Palm Valley co-investment, which did not repeat. Core FFO per share rose about 5.5% to $12.57, which better reflects operating performance.
How exposed is Essex to California and to rent regulation?
Exposure is high. 83% of 2018 rental revenue came from California, and the portfolio is concentrated in Southern California, Northern California, and the Seattle metro area. The 10-K flags rent control and stabilization proposals in multiple municipalities, Proposition 13 property tax reassessment risk, and earthquake risk. These factors could limit rent growth or raise operating costs in ways that are difficult to hedge.
How is the balance sheet positioned, and what are the near-term debt maturities?
Total indebtedness was about $5.6 billion, and the company reported $134.5 million of unrestricted cash and $209.5 million of marketable securities. Roughly 88% of debt is fixed rate, and the $1.2 billion unsecured credit facility was undrawn at year-end. Scheduled 2019 principal payments total about $590 million, including $290 million of 5.57% secured notes repaid in January 2019 and $75 million of unsecured notes due in December 2019. In February 2019, Essex issued $350 million of 4.000% notes due 2029.
What is the outlook for dividends and capital allocation?
The 2018 cash dividend was $7.44 per share, up from $7.00, and the Q4 2018 dividend was $1.86 per share. Against Core FFO of $12.57, the payout ratio is about 59%, which leaves room for reinvestment. Management has $900 million of ATM equity capacity available but issued no shares in 2018, and it replenished its buyback authorization to $250 million in February 2019. Capital will continue to go toward development, redevelopment, and selective acquisitions.
06—Continue